Skip to content

FRM Part I · FRM Exam Part I · Measuring Credit Risk

A bank has a single loan with exposure at default of 10,000,000. The one-year probability of default is 2% and the loss given default is 60% of exposure. What is the one-year expected credit loss?

The expected loss is 120,000, found by multiplying exposure of 10,000,000 by the 2% default probability and the 60% loss given default. Using recovery instead of LGD or omitting LGD gives wrong values.

  1. A80,000
  2. B120,000Correct
  3. C200,000
  4. D1,200,000

Explanation

Expected loss = EAD × PD × LGD = 10,000,000 × 0.02 × 0.60 = 120,000. The 80,000 figure uses the 40% recovery rate instead of the 60% LGD. The 200,000 figure ignores loss severity.

Did you get it right without looking?

One question tells you little. A timed set on Measuring Credit Risk shows your real accuracy, how long you take and where you lose marks.

Practise Measuring Credit RiskFree diagnostic mock

More Measuring Credit Risk questions